U.S. economy stalled during the first quarter, but Fed, analysts retain their optimism

The U.S. economy hit the brakes again despite hopes that 2014 would be the breakout year for the recovery.

According to government data released Wednesday, economic growth was stagnant during the first three months of the year. Gross domestic product — the measure of all goods and services the country produces — grew at a measly 0.1 percent annual rate, below even the most modest forecasts.

That represents the slowest pace of growth since the nation was hanging off the “fiscal cliff” at the end of 2012. With Washington’s budget battles resolved for now and no major federal spending cuts on deck, economists believed that would clear the way for the recovery to kick into second gear.

Many remain optimistic that growth will speed up — it will just take longer to do so. There are plenty of scapegoats for the disappointing data, chief among them this year’s unusually harsh winter. Some economists even suggested that slow growth during the first quarter simply means a bigger bounce-back in the second quarter.

“This is not a weak economy,” said Paul Ashworth, chief U.S. economist at Capital Economics. “This is an economy that had two bad months because of the weather and got back to normal in March.”

(The Washington Post)

Wall Street certainly shrugged off the bad news. After opening in the red, the blue-chip Dow Jones industrial average hit its first record high of the year Wednesday. The other major U.S. stock indexes, the Standard & Poor’s 500-stock index and the tech-heavy Nasdaq composite index, also gained ground Wednesday.

The Federal Reserve also expressed confidence in the recovery. In an official statement after a policy-setting meeting in Washington, it said the economy has picked up momentum after having “slowed sharply” during the winter. Officials at the nation’s central bank voted unanimously Wednesday to scale back its support for the economy by $10 billion a month.

“The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” the Fed said.

But the disappointing numbers underscore how bumpy the road back to normal has proved to be. One of the main challenges facing the Fed is calibrating its response to sometimes conflicting or misleading data.

Economists cautioned that the GDP report released Wednesday is the government’s first swipe at estimating growth during the first quarter; the numbers will be revised two more times in the coming weeks as additional information is collected.

The slowdown that showed up in the initial reading in large part reflected a widening trade gap. Exports dropped 7.6 percent following strong growth at the end of last year, according to government data. Imports also fell, but at a significantly slower rate.

Economists were also surprised that federal government spending did not experience a larger rebound, with expenditures inching up 0.7 percent. Meanwhile, state and local governments cut spending by 1.3 percent despite being on stronger financial footing after the recession. Businesses also pared spending on investments, particularly in equipment, and kept inventories lean.

“It’s hard, when you have these numbers hit you in the face, to take a longer view,” said Richard Moody, chief economist for Regions Financial.

Propping up growth was the surprisingly resilient American shopper. Consumer expenditures rose by 3 percent during the first quarter, driven in part by health-care spending after the implementation of the Affordable Care Act.

That is stoking hopes that the second quarter will be significantly stronger. Ashworth, of Capital Economics, predicts that growth this spring will pick up to an annual rate of 3.5 percent before settling down to 3 percent for the year. Private data released Wednesday morning by human resources firm ADP showed the country added 220,000 jobs in April — better than analysts had anticipated. The government’s official tally of job creation is slated for release Friday.

“The job market is gaining strength,” said Mark Zandi, chief economist at Moody’s Analytics, which calculates the ADP report. “After a tough winter, employers are expanding payrolls across nearly all industries and company sizes.”

But there are concerns that lackluster first-quarter growth could signal more fundamental weakness in the economy. In particular, the real estate market has softened as rising prices and higher mortgage rates have made homes less affordable. Residential investment fell 5.7 percent over the winter, according to government data. It subtracted nearly two-tenths of a percentage point from growth.

The Fed said Wednesday that the “recovery in the housing sector remained slow,” according to its official statement. The Fed has been buying billions of dollars a month in bonds for the past year and a half in an effort to bring down long-term interest rates and boost the real estate market. The program pushed mortgage rates to historic lows, but they have since risen almost a percentage point over the past year after the Fed began hinting it would start scaling back that effort.

The phaseout began this year amid signs that the recovery was strengthening and the labor market was healing.

The Fed said Wednesday it would reduce its purchases of Treasury bonds and mortgage-backed securities by $10 billion to $45 billion a month, about half the amount it was buying in 2013.

The decision amounted to an affirmation of the central bank’s forecast that the recovery will speed up this year. But officials reiterated that the phaseout of bond purchases is not on auto­pilot — the Fed can speed it up or slow it down, depending on how the economy progresses.

“You don’t want to make a whole lot out of [the GDP data], because if you do, you send a policy signal,” said Roberto Perli, head of global monetary policy research at Cornerstone Macro. “I don’t think the Fed is going to overreact.”